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Access to Credit in Argentina

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Access to Credit in Argentina 188 6(5,( financiamiento del desarrollo Access to credit in Argentina Ricardo N. Bebczuk Development Studies Unit Economic Development Division Santiago, Chile, April 2007 This document was prepared by Ricardo N. Bebczuk, consultant of the Development Studies Unit of the Economic Development Division, at the Economic Commission for Latina America and the Caribbean (ECLAC), within the activities of the project “Strengthening the Role of Regional and National Financial Institutions for Sustainable Social Development” (GER/03/002)”, executed by ECLAC jointly with Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ). The author would like to thank Daniel Titelman for his valuable comments on a previous version. The views expressed in this document, which has been reproduced without formal editing, are those of the authors and do not necessarily reflect the views of the Organization. United Nations Publication ISSN printed version 1564-4197 ISSN online version 1680-8819 ISBN: 978-92-1-121637-0 LC/L.2703-P Sales No.: E.07.II.G.52 Copyright © United Nations, April 2007. All rights reserved Printed in United Nations, Santiago, Chile Applications for the right to reproduce this work are welcomed and should be sent to the Secretary of the Publications Board, United Nations Headquarters, New York, N.Y. 10017, U.S.A. Member States and their governmental institutions may reproduce this work without prior authorization, but are requested to mention the source and inform the United Nations of such reproduction. CEPAL - Serie Financiamiento del desarrollo No 188 Access to credit in Argentina Contents Abstract ........................................................................................5 Introduction ........................................................................................7 1. Public Banking in Argentina ......................................................9 1.1 Public banking in Argentina.................................................10 1.2 Public Banks and Access to Credit in Argentina .................11 1.3 Official SMEs Credit Programs ...........................................16 2. Non-traditional credit instruments ..........................................17 2.1 Leasing, Warrant, Factoring and Financial Trusts...............18 2.2 Credit Guarantee Schemes.....................................................20 2.3 Microcredit...........................................................................20 3. Understanding the problem of access to credit in Argentina ....................................................................................23 3.1 Structural barriers to financial development........................23 3.2 The use of non-traditional credit contracts ..........................25 a. Instrument specificity ...................................................25 b. Demand awareness.......................................................26 c. Market structure ...........................................................26 d. Tax aspects...................................................................26 3.3 Shallow financial markets, social costs and government policies .................................................................................26 4. Conclusions and policy prescriptions.......................................29 References ......................................................................................31 Serie financiamiento del desarrollo: números publicados.............35 3 CEPAL - Serie Financiamiento del desarrollo No 188 Access to credit in Argentina Tables Table 1 PUBLIC BANKS SHARES .................................................................................................................... 10 Table 2 RANKING OF PUBLIC BANKS IN ARGENTINA .............................................................................. 11 Table 3 BALANCE SHEET AND PERFORMANCE OF PUBLIC AND PRIVATE BANKS........................... 12 Table 4 BALANCE SHEET AND PERFORMANCE OF MAJOR PUBLIC BANKS........................................ 13 Table 5 SMALL AND BIG LOANS OF PUBLIC AND PRIVATE BANKS...................................................... 14 Table 6 PROVINCIAL DISTRIBUTION OF BRANCHES AND ATMS ........................................................... 15 Table 7 PROVINCIAL DISTRIBUTION OF BRANCHES AND ATMS, EXCLUDING THE CITY AND PROVINCE OF BUENOS AIRES ................................................................................................ 15 Table 8 STOCK OF BANK LOANS AND OTHER NON-TRADITIONAL CREDIT INSTRUMENTS ........... 19 Table 9 ANNUAL NOMINAL INTEREST RATES ON BANK LOANS ........................................................... 19 Table 10 SGRS IN ARGENTINA.......................................................................................................................... 20 Table 11 WARRANTS: UNDERLYING ASSETS (2005) .................................................................................... 25 Table 12 FINANCIAL TRUST FUNDS: UNDERLYING ASSETS (2005).......................................................... 25 Table 13 FINANCIAL CONSTRAIN .................................................................................................................... 27 4 CEPAL - Serie Financiamiento del desarrollo No 188 Access to credit in Argentina Abstract The present work examines the access to credit by financially constrained SMEs in Argentina over the last decade, focusing on the role played by public banks, state credit policies, and non-traditional lending contracts such as leasing, factoring, microcredit and others. We loosely define financially constrained firms as those with good projects and insufficient internal funding. Our conclusions are the following: (a) Since not all SMEs are financially constrained in the previous sense but many of them would be willing to raise at better-than-market terms, a major challenge of any governmental policy aimed to deal with market failures (asymmetric information and intermediation costs) is to carefully sorting out applicants; (b) However, the actual operation seems to lack the technical independence nor resources to implement this basic principle; (c) More importantly, credit policies do not show the desirable degree of transparency towards taxpayers and other interested parties, making it difficult to pass any sound judgment about the impact of the programs in place on production, employment, and income distribution; (d) Based on publicly available information, public banks do not appear to perform better than private banks in improving the access to credit; and (e) Non- traditional instruments should not be expected to be the key for a structural solution to this issue. We finally propose a number of practical guidelines to strengthen the effectiveness, transparency and accountability of governmental credit policies. 5 CEPAL - Serie Financiamiento del desarrollo No 188 Access to credit in Argentina Introduction It is a profusely documented fact that the development of credit markets boost national economic growth and welfare (see Levine (2005) for a survey). Credit markets improve the selection and monitoring of productive and consumption projects, contain financial and liquidity risks, and reduce the costs of movilizing funds across economic units. However, the functioning of this market is far from perfect, as transaction costs and asymmetric information create serious obstacles in the intermediation process. The problem stems from the fact that borrowers have better information and control over the projects and enjoy limited liability on their unpaid debts, which jointly encourage debtors to disguise the actual risk of their projects (adverse selection), to apply the funds to riskier projects than the ones agreed upon with the creditor (moral hazard) and to falsely declare default. As a conflict of interest unravels jeopardizing their expected returns, uninformed creditors react by raising the cost of capital and even rationing its supply, undermining the ability of both good and bad projects to tap financial markets. This kind of behavior has been intensely investigated since the 1980s in the finance and institutional fields. Our main interest is to assess, focusing on the Argentine case, the access to credit for small and medium enterprises, which are the most likely group to be afflicted by the asymmetric information syndrome, and to discuss the role played in this regard by public sector intermediaries and policies.1 Defining access to credit is a tricky issue 1 Strictly speaking, one should include in this definition both the credit for productive purposes as well as that for welfare-enhancing consumption. However, we will restrict ourselves to the analysis of the former. 7 CEPAL - Serie Financiamiento del desarrollo No 188 Access to credit in Argentina that requires further clarification. From a social point of view, one should only be concerned about financially constrained units, that is, those that are willing to use internal funds to undertake profitable projects but, lacking those funds, are unable to obtain capital at a similar cost (or at any cost, for that matter). In a more general setup, the financial constraint should be characterized in a broader sense to include all credit conditions, namely: amount, interest rate, maturity, and collateral, all of which will be discussed throughout the paper. From now on, we will refer to access to credit in this narrow sense, restricting our attention to the segment of SMEs. In this way, we are disregarding cases where credit (i)
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